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Shoe fads come and go, and investors make and lose money chasing them. One of the hottest brands over the past decade is the UGG line of fleece-lined boots, and one of the hottest stocks, its parent,
Deckers Outdoor deck -0.09564148107664981%Deckers Outdoor Corp.U.S.: NYSEUSD73.12
-0.07-0.09564148107664981%
/Date(1427828095655-0500)/
Volume (Delayed 15m)
:
340802
P/E Ratio
8.375715922107675Market Cap
2530032062.46765
Dividend Yield
N/ARev. per Employee
691194More quote details and news »deckinYour ValueYour ChangeShort position
(ticker: DECK). Deckers' revenue has grown more than 15-fold in the past 10 years, to an estimated $1.56 billion this year. Its shares are up 3,300% in the same period -- and that's after the stock's more-than-50% fall, to $53, in the past seven months.

Short sellers, who have long derided UGGs' staying power, have prospered of late. But after talking with retailers, fashion stylists, analysts and customers, it is clear to us that UGGs still have legs. What's more, Deckers' depressed shares look attractive. The stock could rebound to $75 or more in the next year as high sheepskin prices pull back and the company expands internationally and opens new retail stores.

Both of those efforts are still in early days. "This is a good entry point for the stock," says Robert Luna, chief executive and chief investment officer for SureVest Capital Management, a wealth-management outfit in Phoenix that owns the stock. At Deckers' current level, he says, "a lot of the risk management has been done for you."

BEFORE IT WAS FAMOUS FOR UGG boots, Deckers was known for Teva sandals, the first performance sandal line, introduced in 1985. Ten years later -- and two years after the company first sold shares to the public -- it paid about $15 million for the UGG brand, which had made its debut in the 1960s on the feet of Australian surfers. UGG sales grew dramatically from a tiny base, but the brand really didn't reach critical mass until the mid-2000s, after Angel Martinez, formerly chief marketing officer at Reebok, who helped build that company's aerobic shoe brand from scratch, was named CEO. Martinez, 57, who moved to the Bronx with his family from Cuba when he was three, expanded UGG distribution carefully through upscale department stores, including Nordstrom, Neiman Marcus and Bloomingdale's. He kept the company out of mass-market chains and mid-level retailers such as Macy's, to help maintain the brand's cachet.

In the past five years, straight through the recession, Deckers' revenue compounded at a 35% annual clip, with earnings per share rising at an even faster 44% rate. Last year the company earned $199 million, or $5.07 a share, on revenue of $1.38 billion.

In that context, this year looks like a disaster, with the company hit by an unseasonably warm winter, a 40% spike in sheepskin prices (year over year through March), and the crisis in Europe, where UGG has been looking to expand sales. With UGG comprising 87% of Deckers' sales last year, the pain has been even greater.

In addition, Deckers lowered its profit guidance two quarters in a row, and earnings fell far short of analysts' estimates for the March period. In April management lowered full-year earnings guidance by 9% to 10%. Momentum players, and there were many, have fled the stock.

This year analysts expect Deckers' revenue to climb just 13%, with earnings falling nearly 11%, to $178 million, or $4.56 a share.

But this is not a company in crisis. Debt-free, Deckers is sitting on $229 million, or $6 a share in cash, and could generate $100 million in free cash flow this year. Management is responding to the price decline by buying back shares -- $20 million worth in the first quarter, with authorization for another $80 million. "We expect to move on that," Chief Financial Officer Thomas George told Barron's. That could help put a floor under earnings-per-share estimates.

At the same time, sheepskin prices have come down 35% since April, due to growing Australian sheep herds and higher meat consumption. If that trend continues, it will be a strong tailwind for earnings.

UGG'S SIGNATURE SHEEPSKIN BOOTS typically cost around $200 a pair, and since they rarely last more than one or two winters, the company's loyal customer base keeps coming back for more.

In an e-mail, Nordstrom called UGG "truly a valued partner," adding, "their products continue to resonate with customers." Small retailers also are still sold on the fleecy boots. "As soon as it turns cold, the first thing people want is a new pair of UGGs," says Justin Sigal, president of the family-owned store Little of Pittsburgh -- and an UGG retailer for at least 25 years. "We believe in the product big time."

Deckers, which operates 46 UGG retail stores, including a posh flagship store on New York's Madison Avenue, reported high single-digit same-store sales in the U.S. in the disappointing first quarter; UGG-brand sales rose 6.5%. Management tells Barron's that the company's spring and summer line of sandals, sneakers and fabric boots is "performing exceptionally well."

"Long-term investors know the story and strength of the brand," says CEO Martinez.

But Wall Street isn't giving the company the benefit of the doubt. Decker's earnings fell 59% in the first quarter, on tighter operating- profit margins and the European slump. International sales rose 34% in the quarter, to $76 million, or 31% of total sales, but that was lower than expected. That is a disturbing trend for some analysts, such as Camilo Lyon of Canaccord Genuity, who views international growth as a key to Deckers' growth.

"Europe's macro headwinds are crimping demand while negative international retail [comparable-store sales] are alarming, since this is where the majority of new store openings are planned," he wrote in an April report downgrading Deckers to Hold from Buy. The firm says he hasn't changed his opinion.

More than half of UGG stores are outside the U.S. The company plans to open 24 new stores this year, most in Asia and Europe.

SureVest Capital's Luna started buying Deckers' shares in April as they slid into the $60s. "The UGG brand is still strong," Luna says. He thinks the stock could move up more than 40% over the next year as earnings stabilize and begin to grow again.

IN THE PAST SIX YEARS, UGGs has been branching out from its signature "ugly" boots and slippers with more fashion-oriented boots, shoes, sandals, accessories and outerwear. Last fall, the company even began to push an UGG for Men line of boots, slippers, sandals, oxfords and sneakers.

Martinez, who understands the value of sports-celebrity endorsements from his Reebok years, signed New England Patriots quarterback Tom Brady to be the face of the men's brand.

UGG has extended its product line well beyond its classic fleece-lined sheepskin boots. One analysts estimates that line extensions made up half of UGG's $1.4 billion in revenue last year.
Courtesy of Decker

The company doesn't break out results within the UGG brand, but one analyst estimates that classic boots made up about half of UGG sales last year.

Martinez and his team are also working to keep the Teva line fresh, adding sneakers and cross-training footwear to the brand's flip-flops and sandals. Teva accounted for 9% of Deckers' sales last year.

More promising is the Sanuk brand of "eco-friendly" surf-inspired footwear that Deckers acquired last year for about $120 million. This year the brand is expected to bring in $90 million, or 6% of sales. As the company expands distribution through department stores, outdoor and sporting-goods stores, management thinks it could grow to $200 million by 2015.

Deckers has three other small lifestyle- oriented brands that could benefit from the company's marketing and brand-building expertise down the road, though right now they make up less than 2% of sales.

Of the three, Deckers has posted significantly higher earnings growth in the past five years, the current year excepted. It also has a high return on equity of 25%, indicating an effective allocation of capital. But its shares, which trade at 11.6 times analysts' reduced estimates for this year's earnings, are much cheaper than those of Wolverine and Columbia, which trade at price/earnings ratios of 15 and 15.6, respectively.

At 15 times this year's estimates, Deckers would be worth $68. And if earnings per share rebound anywhere near the $5.48 analysts forecast for 2013, the share could head toward $80.